Donald Trump’s decision (or later clarified as “intent”) to impose 10 per cent tariff on imported aluminium and 25 per cent on steel to protect US producers has been seen to be an ill-timed one and is expected to add to the risk of a trade war with partners including China and Europe. The market has stated this to be not in sync with the US economic scenario that recently is adorned by high levels of US manufacturing index noted in almost last seven years. While experts are contesting the level of impact this decision can have on Australian miners, backed by the fact that bulk of China’s aluminium and steel exports don’t reach the US and thus the impact on Australia also may be just modest. Though the tariffs are said to further firm up the interest rates and impact inflation scenario, the updates that might come next week may unveil the stance more clearly. Another key thing would be - what if China also undertakes some harsh stance in terms of retaliation and the whole scenario affects the Australian companies that have huge reliance on China as the target market. This might also call for a change in the strategy to invest. Amidst this, three key stocks that might come in direct line of firing have been discussed herein below.
 

BlueScope Limited (ASX: BSL)

BSL Details

Continued focus on enhanced returns: Despite the possibility that BlueScope may be impacted by the new tariff related decision, the stock edged up by 0.8% on March 02, 2018. The group recently announced for $441.2 million of NPAT reported for 1HFY2018, which is a 23% increase on 1HFY2017. As business performance and economic conditions were improving particularly towards the end of the half and as the group received a benefit of $32.1 million related to the coal supply dispute settlement, the group’s final results were better than expected. In light of the Company’s strong cash position, the Board approved the payment of a partially franked interim dividend of 6.0 cents per share. The Group is planning to buy-back shares having a total consideration of $300,000,000 and the remaining consideration to be paid for shares under buy-back is $143,023,910.51. The group believes that the buy-back will help achieve an appropriate balance between retaining strong credit metrics and will continue to fund its growth opportunities while returning cash to shareholders. The Company currently expects the second half underlying EBIT to be around 25% higher, after deducting the one-off benefit of $32.1 m of coal settlement from 1HFY18 underlying EBIT.
 

Recovery of Spot Spreads on strong steel prices (Source: Company Reports)
 
Coming back to the latest jitter on import tariffs by the US, it is expected thatmore than $170 million of Australian steel and aluminium exported to US can be at a stake which is largely handled by BlueScope as it is the sole exporter of Australian steel to US. Meanwhile, the stock price has climbed up by 50% in the past six months and the stock is already at high levels. With this backdrop, the stock looks “Expensive” at the current market price of $16.30
 

BSL Daily Chart (Source: Thomson Reuters)
 

Rio Tinto Limited (ASX: RIO)

RIO Details

Strong Balance Sheet with Changes to Ore Reserves and Mineral Resources: On the other hand, RIO was seen to witness a 1.2% price drop with the tariff news. RIO recently released its annual report for 2017 and included a write back of Ore Reserves to Mineral Resources at the Simandou iron ore project in Guinea. Mineral Resources are quoted on a 100 per cent basis and Rio Tinto’s interest in the Simandou iron ore project is 45.05 per cent, with Chinalco (39.95 per cent) and the Republic of Guinea (15 per cent).  Considering the current uncertainties in timing of development and potential variations to project scope under future project ownership, the project Ore Reserves have been written back to Mineral Resources. There were some significant changes in the estimates of Ore Reserves and Mineral Resources at Rio Tinto’s Argyle Diamond mine in the East Kimberley, Western Australia, wherein Rio’s interest is 100 per cent. During 2017, estimate of Argyle Ore Reserves decreased by 13Mt from 29Mt to 16Mt and this decrease includes depletion of almost 5Mt which is due to production activities in 2017. There were few changes in the estimates of Ore Reserves and Mineral Resources for four Pilbara iron ore deposits in Western Australia. During 2017, estimated iron Ore Reserves increased by 165 Mt after depletion from mining and during the same period estimated Mineral Resources increased by 508 Mt. The group might give more insights on this at the annual general meeting to be held in May 2018.

With regards to the financial performance, Rio Tinto reported a strong set of results for 2017 with operating cash flow of US$13.9 billion and full-year dividend of US$5.2 billion and an additional US$1 billion of share buy-back. It resulted into the total return to shareholders of about US$9.7 billion. Net earnings were US$8.8 billion in 2017 as compared to US$4.6 billion in 2016. RIO continued to realise considerable savings from its cost reduction programme and delivered US$0.6 billion of pre-tax improvements. Looking forward, managed and non-managed joint ventures as well as partnerships are likely to play a still larger role in the Group’s portfolio.  It operates in global markets and accepts the impact of exchange rate movements; and is driven by the market prices and seeks premium wherever possible. Risk exposures include Financial Risk from external events and internal discipline on Group’s liquidity which is required to fund capital expenditure, Strategic Risk relating to Group’s ability to develop new projects, and Operational Risk in respect of sustaining capital expenditure.
 

Changes in the estimates (Source: Company Reports)
 
On the tariff issue, though it is yet not clear whether the Turnbull government will get to see President Trump exempting Australia from paying the tariff; Rio Tinto’s Canadian aluminium smelters that are responsible for over 50% of the $US4 billion in annual Canadian sales to the US, are expected to witness some hammering. Given the macro scenario and the group’s fundamentals, the stock seems to be “Expensive” at the current price of $76.86
 

RIO Daily Chart (Source: Thomson Reuters)
 

BHP Billiton Limited (ASX: BHP)

BHP Details

Solid operating performance for 2017: BHP’s stock slipped by 1.6% on March 02, 2018 at the back of the tariff news. In the December 2017 half year, BHP reported an exceptional loss of US$210 million (after tax) in relation to Samarco dam failure. BHP remains committed in supporting the Renova Foundation with the recovery of communities and ecosystems that are affected by Samarco tragedy. Further, the underlying attributable profit was US$4.1 billion as compared to US$3.2 billion in the prior period and underlying EBITDA margin was 53 per cent as compared to 54 per cent in the prior period. Productivity guidance remains unchanged and US$2 billion of gains are expected to be delivered over the two years to the end of the 2019 financial year. A negative movement in productivity of US$496 million was recorded which reflected lower volumes and unfavourable fixed cost dilution at Olympic Dam. This was due to the smelter maintenance campaign (US$202 million) and due to the impact of reduced volumes at Queensland Coal and Petroleum (US$225 million), with a favourable change of US$206 million observed in the estimated recoverable copper in the Escondida sulphide leach pad in the prior period.
 

EBIT Margins (Source: Company Reports)
 
It was observed that the global steel industry was recovering in the December 2017 half year as productivity growth was led by emerging markets. However, the recent tax reforms announced by US Economy affected the Group as the corporate tax rate got reduced from 35 to 21 per cent and the Group recognised an exceptional income tax charge of US$1,828 million. Thus, it will be crucial to note any changes that the group might witness owing to the proposed tariffs, if approved. We give a “Hold” on the stock at the current price of $29.63
 

BHP Daily Chart (Source: Thomson Reuters)

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